Purchase Loan

Purchase Loan Resources:

Dos and Don'ts for Residential Mortgage

Purchase the Home of Your Dreams

Buying a single-family home is a great way to start your biggest investment in your life. Why should you go with a single-family residence? Because they are generally the properties in most demand, which in turn makes them the easiest properties to sell. The basic steps for obtaining financing are much the same with any type of lender.

Five step financing process involves:
-Qualifying the borrower
-Qualifying the property
-Approving and processing the loan
-Closing the loan
-Servicing the loan

Lenders first ask prospective borrowers to complete an application form. Most applications are similar and ask borrower for employment record, credit references, financial statements and so on. To very the accuracy of the information, the loan officer or loan processor checks with past employer's, requests verification of deposits from the bank(s), and contacts references. In addition most lenders use three Cs - chanter, capacity and collateral as screening device to determine if the borrower meets the qualifications set by the lender.

Character. Lender considers the attitude toward financial obligations as evidenced by their track record of borrowing and repaying loans evidenced by credit reports. Lenders also try to ascertain whether borrowers are honest in their dealings.

To desire to pay is very difficult measure. There are methods used by a lender to determine the borrower's desire to make timely payments such as FICO score. Fair Issac Corporation developed this scoring model system, used by most lenders today. Scores of 660 or more are very desirable although scores of 620 to 660 are acceptable. Scores below 620 generally mean institutional lenders will not make the loan. The applicant's credit report will show if the borrowers have any late payments. If the borrower has a number of late payments, this usually means the borrower does not a desire or cannot afford to make timely payments.

Capacity. In considering borrower's capacity, lenders want to know their ability to repay the debt. Capacity is strengthened by an occupation that ensures a steady income. The level of present debts and obligations also is a factor; too much debt may prevent a borrower from discharging a new obligation.

Lenders will consider second job income if the applicant has a history of second job.

Lending institutions sometimes take overtime wages into consideration. Other lenders will consider both spouses' wages in computing the gross income (income before taxes) of the borrower, even if only one spouse is applying for the loan. Occasionally, a lender will require a cosigner - a person with additional capital who agrees to share liability for the loan to strengthen the borrower's loan application. Lenders also might reduce down payment requirements with a cosigner.

When a lender qualifies a borrower, the lender is attempting to answer few questions:
-Can the borrower afford the payments?
Will the borrower make the payments on time?

To determine whether the borrower has the capacity to make the monthly payments, the lender needs to answer few questions?

- Does the borrower earn enough money to make the payments?
- Will the income be a steady source of income?
- Does the borrower have the down payment?
- Can the borrower make the payments on time?

The lender is going to verify the applicant's ability to make the timely monthly payments and his or her employment history. The lender will want to know the down payment amount before determining the loan amount.

Once the lender knows the loan amount, lender can calculate the principal, interest, taxes, and insurance (PITI) on the loan. This is the first step in the qualification process.

To qualify borrower's lenders use two ratios. The front end ratio, also called top ratio (mortgage payment ratio), is the mortgage payment (PITI) dived by the borrower's gross income. Most loans require that the ratio is around 28 percent or less.

The other ratio is called the back-end ratio, or bottom ratio (total obligation ratio). This ratio should be approximately 36 percent or less to qualify for a home loan.

From the verification of employment and other financial information, the lender determines the borrower's gross income. Lenders require a signed statement from the borrower to permit a check with the borrower's employer to verify wages and length of employment. Gross Income is defined as the income made by the borrower before taxes and deductions. For husband and wife the gross income for loan is generally the total gross income of the husband plus the toil gross income of the wife. Employment usually must be verified for two years.

The lender also needs to determine the monthly long term credit bills owed by the borrower. These include car payments, credit cards, furniture payments, student loans etc. If a credit will be paid in less than ten months, it is not included.

Collateral. After the loan is granted, the lender has to rely for a long time on the value of the security of the loan for the safety of the investment (home), should the borrower default. For this reason, lenders consider it important to qualify the property as well as the borrower.

Because the security is the home, lenders require a careful valuation of the property, the collateral. The value depends on the property's location, age, architecture, physical condition, zoning, floor plan and general appearance. The lender will have an appraisal done by the appraiser.

When an appraisal is less that the purchase price, it requires the seller to lower the price or the buyer to come up with a larger down payment as the amount of loan will be reduced. The purchaser often does not have the resources for the large down payment. In addition, many offers include a contingency that the appraisal will be at least the amount of the purchase price. This provides an escape for the buyers.

Man mortgage loan officers are paid by commission. They don't get paid when a loan cannot be funded.

Approving and Processing. Processing involves drawing up (preparing) documents and disclosures regarding loan fees, and issuing instructions for the escrow and title companies, Loan papers include the promissory not (the evidence of debt) and the security instruments (the trust deed or mortgage).

Closing the Loan. Closing the loan involves signing the loan papers and preparing closing statements.

Servicing the Loan. After the title has been transferred and the escrow closed, the loan servicing portion of the transaction begins. This refers to the record keeping process once the loan has been placed. The goal of loan servicing is to see that the borrower makes the timely payments so that the lender makes the expected yield on the loan, which keeps the cost of the entire package at a minimum.

Borrower has a wide choice of loan types from fixed loans to adjustable loan, the special features of the loans vary by lender. A buyer must analyze his or her needs and the importance of down payment, loan cost, interest, assumability, loan terms and so on.